As does U.S. GAAP, the FRF for SMEs requires consideration of events occurring after the date of the financial statements and before the date the financial statements are available for issue. Two types of events should be considered:
- Events or transactions that provide more evidence about amounts recorded at the financial statement date (known as type 1 events under U.S.GAAP).
- Events indicating conditions that arose subsequent to the financial statement date (known as type 2 events under U.S. GAAP).
Reflection of the events in the financial statements and footnotes will depend on the type of event. Should the subsequent event be so pervasive as to cause an eminent threat to continued existence of an entity, such as a deteriorating financial position or results of operations, it may not be proper to prepare financial statements on a going-concern basis.
Financial statements should be adjusted when transactions or events occurring subsequent to the financial statement date materially affected recorded balances. For example, a major customer with a significant balance in accounts receivable that declares bankruptcy after the financial statements' date, will cause management to reconsider the adequacy of its allowance for uncollectible accounts. An adjustment of the allowance as of the financial statement date may be necessary to provide for an increased uncollectible portion of such receivable.
For new conditions or events occurring after the financial statements date, adjustment would ordinarily not be made. Depending on their significance, however, such events would be disclosed in the footnotes. An example would be a significant lawsuit filed by or against the reporting entity. On the other hand, if an estimated provision for loss has been recorded in the financial statements for a lawsuit filed against an entity, and a judgment has been handed down for a materially different amount, the financial statements at the reporting date should be adjusted.
Disclosures for subsequent events under the FRF for SMEs include the following:
- The date through which subsequent events have been evaluated, which is the date financial statements are available for issue for non-issuers.
- Events occurring after the financial statement date that do not relate to recorded amounts at that date, but which should be disclosed to prevent the financial statements from being misleading. Specific disclosures are:
- A description of the event.
- An estimate of the probable effect on financials statements, if practical.
Join me for four, two-hour webcasts on the FRF for SMEs later this fall. You can register by clicking the “Live Webcasts” box on the left side of my home page, www.cpafirmsupport.com .